1290 Impact of a Function-Based Payment Model on the Financial Performance of Acute Inpatient Medical Rehabilitation Providers: A Simulation Analysis Janet P. Sutton, PhD, Gerben DeJong, PhD, Haiyun Song, MS, Deborah Wilkerson, MA ABSTRACT. Sutton JP, DeJong G, Song H, Wilkerson D. Impact of a function-based payment model on the financial performance of acute inpatient medical rehabilitation provid- ers: a simulation analysis. Arch Phys Med Rehabil 1997;78: 1290-7. Objectives: To operationalize research findings about a med- ical rehabilitation classification and payment model by building a prototype of a prospective payment system, and to determine whether this prototype model promotes payment equity. This latter objective is accomplished by identifying whether any fa- cility or payment model characteristics are systematically asso- ciated with financial performance. Design: This study was conducted in two phases. In Phase 1 the components of a diagnosis-related group (DRG)-like pay- ment system, including a base rate, function-related group (FRG) weights, and adjusters, were identified and estimated using hospital cost functions. Phase 2 consisted of a simulation analysis in which each facility’s financial performance was modeled, based on its 1990-1991 case mix. A multivariate regression equation was conducted to assess the extent to which characteristics of 42 rehabilitation facilities contribute toward determining financial performance under the present Medicare payment system as well as under the hypothetical model devel- oped. Participants: Phase 1 (model development) included 61 re- habilitation hospitals. Approximately 59% were rehabilitation units within a general hospital and 48% were teaching facilities. The number of rehabilitation beds averaged 52. Phase 2 of the stimulation analysis included 42 rehabilitation facilities, sub- scribers to UDS in 1990-1991. Of these, 69% were rehabilita- tion units and 52% were teaching facilities. The number of rehabilitation beds averaged 48. Main Outcome Measure: Financial performance, as mea- sured by the ratio of reimbursement to average costs. Results: Case-mix index is the primary determinant of fi- nancial performance under the present Medicare payment sys- tem. None of the facility characteristics included in this analysis were associated with financial performance under the hypotheti- cal FRG payment model. Conclusions: The most notable impact of an FRG-based pay- ment model would be to create a stronger link between resource From the National Rehabilitation Hospital Research Center, Medlantic Research Institute, Washington, DC (Dr. Sutton, Dr. DeJong, Ms. Song), and the Commis- sion for the Accreditation of Rehabilitation Facilities (CARF), Tucson, AZ (Ms. Wilkerson). Submitted for publication August 2, 1996. Accepted in revised form April 9. 1997. Supported in part by research grant H133A10017 from the National Institute on Disability and Rehabilitation Research. No commercial party having a direct or indirect interest in the subject matter of this article has or will confer a benefit upon the authors or upon any organization with which the authors are associated. Reprint requests to Janet P. Sutton, 102 Irving Street NW, Washington, DC 20010. 0 1997 by the American Congress of Rehabilitation Medicine and the American Academy of Physical Medicine and Rehabilitation 0003.9993/97/7812-4134$3.00/O intensity and level of reimbursement, resulting in greater equity in the reimbursement of inpatient medical rehabilitation hospi- tals. 0 1997 by the American Congress of Rehabilitation Medicine and the American Academy of Physical Medicine and Rehabili- tation E VER SINCE THE Omnibus Budget Reconciliation Act of 1990 mandated that the Health Care Financing Administra- tion (HCFA) propose a method for transforming Medicare reim- bursement of acute inpatient rehabilitation hospitals from the pres- ent cost-based system to a system based on “nationally determined average standardized amounts” [Section 4005(b)(l)], inpatient medical rehabilitation providers have been bracing for an uncertain financial future. The financial impact of a prospective payment system (PPS) on inpatient rehabilitation providers is, in part, determined by the structure of the payment model and by individual providers’ responses to the incentives inherent in the payment system. A case-rate PPS, modeled after the diagnosis-related groups (DRGs) proposed by HCFA and enacted by Congress in 1983, consists of two components: (1) a classification model that cate- gorizes patients on the basis of clinical indicators and similarity in resource consumption; and (2) a payment model that assigns a reimbursement rate to each of the groups in the classification model.’ At least two significant efforts to develop function- based classification models have been reported in the medical rehabilitation literature.2.3 Sutton and associates4 evaluated the components of a function-based payment model for medical rehabilitation relative to criteria from a Delphi survey of medi- cal rehabilitation providers, payers, researchers, and consumers. As the industry moves closer to defining a PPS for inpatient medical rehabilitation, an essential step in the process is de- termining how the payment model and its design features are likely to affect hospital financial performance. Theoretically, the payment model should promote equity by reimbursing providers relative to the actual resources required to rehabilitate their selected case mix. Features of the payment model, such as the case weights, adjustments for the area wage level, and adjust- ments for costs associated with the geographic location, should neither favorably nor adversely influence each facility’s finan- cial performance. Rather, the payment model should promote a level playing field, in which financial gains are attained through the efficient delivery of services. For instance, unless the case weights adequately reflect differences in resource con- sumption required to treat different categories of patients, facili- ties treating a large number of patients in the “undervalued” categories will be systematically undercompensated, whereas those treating a large number of patients in the “overvalued” categories will be systematically overcompensated. Researchers studying the impact of Medicare’s PPS for acute care hospitals found that the characteristics of the payment sys- tem associated with hospital financial performance include the case-mix index (CMI), the intern- and resident-to-bed ratio (IRB), and sole community hospital status.5’6 The finding that Arch Phys Med Rehabil Vol78, December 1997